This article is written by Ron De Luca who is a senior risk analyst at Mercer Capital Ltd., a NZ regulated forex brokerage.
Since the Swiss Franc crisis shook the global currency market, many brokers either became insolvent (Alpari) or are well on their way to becoming insolvent (FXCM). There is now a debate amongst brokers about whether or not traders should be responsible for negative account balances. This article will address why I believe the traders should never be responsible for negative balance reimbursement.
One of the main causes of this issue are the risky margin call level settings that many reputable brokers offer to traders. These levels are typically below what should be considered safe from a proper risk management perspective. The reason is there are many scam brokers in the market offering too-good-to-be-true trading conditions. The reputable brokers then need to compete by offering unrealistic terms to new clients.
Because the brokers allow traders to use almost all of their equity before being stopped out, there’s not enough padding at a margin call to properly exit a trade in extreme market movements. Therefore, the investor’s account hits a minus because there’s no one in the market to take the other side of the trade.
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The question then arises: Should the client be responsible for the negative balance? The answer is simply “no” for the following reasons.
1. The client chose to invest a specific amount of money. When the investment was made, the investor did not request a loan from the broker in the case of the account going into negative. The investment is the maximum amount of money the trader is willing to lose.
2. Just as investors need to manage their own risk parameters when investing, so do forex brokers. They have full teams devoted to managing company risk. If the margin call settings are too risky, client accounts can dip into the negative.
It’s important to find a reputable broker with realistic trading terms. This allows the trader to have a fair opportunity to profit and the broker can minimize their risk.
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